Surprised by the depth of some problems in the company

Barry McCarthy, Spotify’s chief financial officer, attends the annual Allen & Company Sun Valley Conference, July 11, 2018 in Sun Valley, Idaho.

Drew Angerer | Getty Images

When Barry McCarthy showed up to race group About three months ago, he was surprised to learn how disrupted the supply chain was and how quickly the company’s cash flow was shrinking.

“The nature of turnarounds is that they are full of surprises,” McCarthy told analysts on Tuesday during his first post-earnings conference call with Peloton.

After digging into the business, the CEO said he learned that Peloton was “weaker across the supply chain” than he expected. He said the biggest surprise during the previous quarter was the cash flow and how bleak it was.

Yet the first Netflix Other Spotify The executive also said he was surprised by Peloton’s ability to “quickly address” its cash flow situation without diluting existing shareholders and while continuing to capitalize on the business adequately. Another positive point McCarthy noted was that he found more talent at Peloton HQ than he thought he would discover.

McCarthy’s comments on Wall Street on Tuesday were incredibly high stakes given the plunging Peloton share price and waning confidence among investors that the business can succeed in a post-pandemic world.

The letter from the CEO to shareholders arrived on Tuesday disappointing results for the quarter ended March 31 and a grim outlook for the current quarter, which ends June 30 and marks the end of Peloton’s fiscal year. McCarthy was quick to point out areas where Peloton’s former management hadn’t been as successful as he laid the groundwork for his turnaround plan.

At least for now, investors are more focused on the current state of affairs. Peloton shares fell to an all-time low on Tuesday morning, dragging the company’s market valuation to around $ 4 billion. It had been up to $ 50 billion early last year.

However, McCarthy concluded the conference call by telling Wall Street that he was “quite optimistic” about the company’s path, “despite the share price.”

“I don’t mean to sound a bit ‘pollyannaish,’ but I am confident that someday soon we will look back on this call as one of the important turning points in the industry,” he said.

A change of priority

On McCarthy’s checklist are:

  • Entering third party resellers by selling Peloton products through other businesses
  • Growing awareness of the company’s digital app, which can be an option for people who don’t want to engage with a bike or tread
  • Expanding internationally
  • Wider implementation of a pilot test where customers pay a flat rate to rent one of Peloton’s exercise bikes and access its live and on-demand training classes

“We have to be good with hardware, but being good with hardware isn’t nearly enough,” he said on the call. “And that requires a shift in the company’s investment priorities.”

Furthermore, most importantly, it aims to return the company to positive free cash flow in its next fiscal year.

A recent cash infusion from JPMorgan and Goldman Sachs it should allow him to do so, McCarthy said, despite any economic headwinds. According to McCarthy’s letter, Peloton ended its last “small cap” quarter with $ 879 million in cash and unlimited cash equivalents.

However, many investors will likely take a break until they are able to see more signs of progress. Some also fear that Peloton could lose some of its existing subscriber base – which proved loyal during the pandemic – if it changes too much too soon.

UBS analyst Arpine Kocharyan said he expects Peloton’s investors to be more concerned in the short term by the company’s ability to preserve its cash flows and liquidity. Peloton’s strategy under McCarthy is to focus more on the net present value of the subscriber, compared to a previous focus on hardware profits, Kocharyan said in a note to customers.

Other analysts are wondering if McCarthy’s strategy is really that different from former Peloton CEO and co-founder John Foley.

Peloton was successful under Foley, who led the connected fitness equipment manufacturer at the height of the pandemic. But it also faced challenges as consumer demand began to decline, but costs still increased, and Peloton made investments in things, like additional manufacturing centers, that it no longer needed.

“The company continues to hint in its words that it knows it needs to go back,” said Simeon Siegel, analyst at BMO Capital Markets. “Yet they cling to the idea that their growing story is their North Star.”

“If the company just sold its existing inventory and focused on embracing its existing loyalists, there should be a reasonable path to profitability,” he added. “The problem is that history is clouded by the belief that they have the right to grow as fast and as much as they want.”

McCarthy reiterated Tuesday that Peloton’s goal is to one day have 100 million members, a goal that Foley was unveiled in 2020.

“I know of digital apps that already have more than 100 million fitness-focused people. And I can’t think for life because, given our success at the top of the category, we might not be one of those digital apps,” he said. .

Peloton had 7 million subscribers as of March 31st.